Is the property market topping out?

So how do you tell if the residential real estate market is topping out? That’s the question on everyone’s lips at the moment, particularly in the hot Sydney property market.

For self-managed investors it whether to cash in their chips why the capital gain is locked in. For vendors it’s whether it’s too late to grab some sales at the top of the market. Usually both miss the peak because they’ve been too greedy.

But there are a series of indicators, which give you an early signal that things are changing in the market. Recently Data News highlighted the relationship between rental growth and yield in relation to other investments as early indicators that things might be slowing down.

This week the Australian Financial Review added in a number of signals that indicate one way or another twhich way the property market might be heading.

These include:

• Clearance rate: these are definitely slowing from record levels, but it’s complicated by seasonal factors – weather and school holidays – and the fact that supply is slowing. In Sydney there’s only three month’s worth of supply. No one’s sure of the reason for this but the trend is down.
• Reserve prices: this is the level of discount a vendor is willing to absorb to get the deal done. It’s still a tight measure at the moment, but again might be another factor limiting supply as sellers hang out for top prices.
• Length of time on market: This is still seen as a positive with more properties selling faster particularly at this time of the year. It could explain the undersupply of offerings and possibly encourage more vendors to move now instead of waiting for the usually buoyant Spring selling season. This is a crucial indicator of price momentum
• Who’s buying: Official figures released this week show investors at the moment account for a staggering 62 per cent of the market, up from 57 per cent a year ago. But the growth in investor mortgages appears to be slowing quickly. Remember if prices are peaking investors will be doing their sums based on forward earnings from rents less overheads. They have been able to underpin pricing of late because they are able to finance purchases easily. If they revert to normal trend where they only control about 4 or 5 per cent of the national property market then prices could cool.
• Interest rates: The current property boom has been financed on historically cheap money and most forecasters think the Reserve Bank of Australia will cut again soon. However at dbdata we feel the difference between 2 per cent or 1.75 or 1.5 per cent will make little difference to the property market. The RBA might be forced to stay its hand as international forces drag down the Aussie dollar, which results in a virtual rate cut for industry. We also hold the view that when the US Federal Reserve Board starts to lift rates sometime before the end of the year, pressure will be brought to bear on $A and the RBA might even have to consider lifting rates.
• Employment: You can’t have a strong property market without buyers and those buyers need income and confidence that their incomes will be ongoing. At the moment the job market is finally balanced nationally with NSW leading the pack and West Australia coming up the rear. Any indication that unemployment might jump for any number of reasons would be a negative for property.
• Supply: Both Sydney and Melbourne and to a lesser amount Brisbane are all building new housing as fast as they can go. This should help lessen the undersupply that has affected Australia for more than a decade. This ordinarily would depress the property market, particularly for investors. Most expect discount this scenario that property will move into oversupply any time soon. This is because most major developments are taking place in the apartment market, which takes a lot longer to show up in the official statistics. (Apartments just take longer to build). This means the supply side shouldn’t be an issue until late 2016 at the earliest.
• Foreign: We haven’t mentioned the influence of overseas buyers because there is just not enough official data available to make an informed opinion. There is no doubt they are a factor and may become even bigger in the future, but anecdotally it looks like major concentrations in certain parts of the market. ie students and upper luxury.

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